Islamic banking is about equity (II)

The ratio at which the finance-provider shares in the profits of the business with the party receiving the additional funds is usually fixed and pre-determined, and made known in advance to all concerned. The loss, however, will be shared in the exact proportion of the capital invested by each party. The profit-sharing ratio is to […]

The ratio at which the finance-provider shares in the profits of the business with the party receiving the additional funds is usually fixed and pre-determined, and made known in advance to all concerned. The loss, however, will be shared in the exact proportion of the capital invested by each party. The profit-sharing ratio is to be mutually agreed upon; and could be different from the ratio in which the two parties (finance-provider and user) have invested in the total capital of the business or project. Both parties are allowed to charge a fee or wage for any management or other labour put in to the project. All providers of capital in a specific business are entitled to participate in the management of the business but are not necessarily required to do so.

Musharakah as a financial technique is similar to Mudarabah because the provider of finance shares in the profits directly and is equally contracted to bear the losses, if any, to the extent of his investment. This explains why these two financial techniques of Islamic banking are often categorized together as Profit-and-Loss-Sharing (PLS).

Leasing or Ijarah is another financing technique in Islamic banking. An individual who is short of funds, for example, may approach another with a surplus (the financier) to fund the purchase of a productive asset. The financier may do so by buying and renting it out to the one who needs the asset or its services. Some of the conditions guiding the validity of a leasing contract or agreement include: (a) the service that the asset is supposed to provide and for which it is being rented should be definitely and clearly known to both parties; (b) the asset remains in the ownership of the lessor who is responsible for its maintenance so that it continues to give the service(s) for which it was rented; (c) the leasing contract is terminated as soon as the asset ceases to give the service(s) for which it was rented; (d) the price of an asset that may be sold to the lessee at the expiry of the contract cannot be pre-determined. It can only be decided at the time of the expiry of the contract. Banks may provide companies with machinery and equipment.  Payments to the bank in such a case must be made in installments over a mutually agreed period.  Depending on the initial agreement, the bank is obliged to fully transfer the title of the equipment at the end of the period to the hiring company or party as a gift.

There is Bai’al Mu’ajjal as a financing technique of Islamic banking.  Literary, it refers to a sale on a deferred-payment basis. Delivery of goods, inputs or implements are made immediately while the price agreed is paid by the purchaser at a given date in the future. The price includes the cost, plus a reasonable margin of profit to cover administrative costs.  As the Islamic bank, for instance, sells inputs to farmers on a deferred-payment basis, the transaction is a sale and not a loan. Islam permits the sale of goods for cash or on credit on the condition that the price, once agreed upon between the parties at the time of bargain, is not changed even if the payment is not made on the date it is due.

Mark-up and mark-up (i.e. compounding the amount of profit) is not permitted in Islam. If this condition is violated, the transaction degenerates in to riba. This is because if secondary mark-up is not avoided, the objective of eliminating interest is not defeated; and usury thereafter enters in to the transaction. Bai’al Mu’ajjal lacks any deterrent for defaulters. The only guarantee for timely payment is the creditworthiness of the purchaser. This defect can be countered by enacting appropriate laws that will allow for the imposition of monetary fines on malicious defaulters. Scholars are of the opinion that such funds on recovery must be deposited in the government treasury (bait ul-maal) and must not be paid to or used as income by the seller.

The Prophet (SAW) has also authorized Bai’al Salam in the economic system of Islam. It is a contract that involves the sale of a good to be delivered to the purchaser at future date, which must be clearly defined at the time of the contract. The conditions for the validity of such future sales are that: (a) the goods are not available or cannot be delivered at the time of concluding the contract; (b) the consideration in lieu of advance payment must be paid or the rate of it is fixed at the time of entering in to the contract. Failure to meet these conditions invalidates the contract. A Salam contract is also void if a buyer’s consideration is in the form of a negation of an existing debt.

Risks in Bai’al Salam remain with the seller until the time of delivery. The purchaser in this contract has a right of inspection as specified at the time of contracting. Like Bai’al Mu’ajjal, the Salam contract is not a loan but a transaction. Jurists are united in their opinions that the price fixed in the contract must be paid in full and in cash, immediately at the time of the contract. The delay before the goods are delivered must be a defined period. The goods must equally be of a type commonly available at the time fixed for delivery. These conditions are intended to protect the financier from unnecessary risks while enabling the producer to deliver the produce (if need be) from another source; provided the conditions of kind, quality and quantity are met.

All forms of speculative transactions (Gharar) are prohibited under Islamic banking. This includes Muhaqalah, which is the sale of grains still growing (i.e. un-harvested). Ihtikar, which is the hoarding of commodities with a deliberate motive of causing artificial scarcity, is also prohibited by the laws of Islamic economics. Other forms of Gharar include the sale of animals still in the womb; sale of birds or fishes not yet hunted or caught by the vendor; sale of land or commodity not owned by the seller; sale of clothes or similar articles of merchandise without adequately exposing them to the buyer; and sale of commodities which defects have been disguised.

It is our prayer that pessimists of Islamic banking in Nigeria would allow the Central Bank of Nigeria (CBN) to give this fair system of banking a trial. May Allah (SWT) guide us to cherish the values of Islamic banking, amin.

Note: This column will be on a short break from next week.